Has the Coronavirus halted DeFi’s momentum?

Q1 Decentralized finance sector analysis

March 2020 witnessed the most volatile day in the price of cryptocurrency ever. Hence it was no surprise the Ethereum DeFi dapp category – as tracked by DappRadar also experienced an all-time high in terms of daily active unique wallet activity.

Yet even before this event, the first three months of 2020 had seen strong growth in daily activity.

As demonstrated by the trailing 30 days average total breaking through the 2,000 daily active unique wallets total. This activity outpaced the previous peak which started in November 2019 with MakerDAO’s multi-collateral DAI launch. And the subsequent rise of interest rates being offered in dapps with saving products.

Yet, as we’ll discover, each Ethereum DeFi dapp has its own specific use case and audience. While such headline trends are clear. It’s important to dig into the specifics to investigate the granularity influencing the overall sector.

MakerDAO

In conjunction, users could start generating savings on their DAI as well as trading tokens. Making MakerDAO (and its associated Oasis product) a fully-fledged DeFi dapp for the first time.

This additional functionality drove strong spikes in daily usage. Even before its 12 March peak, MakerDAO had experienced two days with more than 1,000 daily active unique wallets.

It’s also worth noting that in the weeks prior to 12 March. MakerDAO had multiple consecutive days with over 500 daily active unique wallets. Post-12 March, however, usage dropped dramatically, as many loans had been liquidated and the Dai Savings Rate dropped to zero.

On a monthly basis, during this time MakerDAO was attracting a lot of new users. Well over 4,000 new unique wallets interacted with its smart contracts in the months of November 2019 through to February 2020.

Given the nature of MakerDAO as a dapp used mainly for minting DAI or for setting up a savings account with DAI. It’s no surprise the dapps rolling monthly retention rate is relatively low at an average of 9% since November 2019.

This just means once someone has either minted DAI or locked DAI into savings. The vast majority don’t pay back the loan or shut down their savings account in the subsequent month.

(We measure retention in terms of does an active wallet during a month return the following month.)

Synthetix

Born out of the Havven stablecoin project, Synthetix has since evolved into one of the most sophisticated DeFi dapps.

It offers users the ability to earn a share of trading fees, through its Synthetix Network Token (SNX). As well as taking loans, and buying and trading ERC20 tokens that track assets ranging from fiat currencies to commodities such as gold. As well as other (non-ERC20) cryptocurrencies like Litecoin and Ripple.

Synthetix has experienced a very high level of volatility in terms of its daily activity levels (and SNX price); both as a result of its relative novel nature and because of the wider dapp trends.

These have boosted its ranking. Making it the second most popular DeFi application during 2020 in terms of trailing 30-day average.

The more active daily trading nature of the dapp – at least compared to the likes of MakerDAO – can be seen in terms of its retention characteristics.

Synthetix has been building its monthly audience since launch. Shown by the dark blue column, by retaining more of its new monthly users than it loses the following month.

This is seen more clearly in the monthly retention graph. Which shows a steady upwards curve, rising from 15% in February 2019 to over 50%.

Of course, the drop in March 2020, which in part was driven by the drop in the SNX token price suggests some loss in confidence that will have to be rebuilt in the coming weeks.

Compound

For a long time, the Yang to MakerDAO’s Ying. Savings and loans dapp Compound has experienced a strong decline in activity since the relaunch of MakerDAO in November 2019.

The reason is obvious. Users can now access such features from other dapps, including MakerDAO itself.

This situation resulted in the trailing 30 day average for Compound dropping. From over 500 daily active unique wallets in early September 2019 to under 250 in early January 2020.

It has recovered somewhat since then. Notably, as its saving interest rate has become more competitive as other dapps have reduced or – in the case of MakerDAO – stopped offering any interest at all.

Of course, as a savings and loans dapp without trading components. User activity through Compound tends to be longer-term than monthly. It generally has high levels of new wallets interacting with its smart contracts, which don’t come back the following month.

Its monthly retention rate – in the range 50 to 25% – is higher than MakerDAO however. It will be interesting to see whether the recent upward trend in February and March is maintained in the coming months. As we expect many DeFi dapps reconsider their business model for 2020.

dYdX

As with most DeFi dapps, dYdX enables lending and borrowing of tokens but the main feature of this platform is the ability to make leveraged trades, that is trading tokens based on borrowed collateral.

It allows users to leverage up to five times their own collateral across three crypto pairs – ETH-DAI, ETH-USDC and DAI-USDC.

Obviously the audience for such sophisticated (or risky) activity is much smaller than other DeFi features. Reflected in dYdX’s user base, which until recently was sub-250 daily active unique wallets.

However, the crypto price volatility of recent weeks, including that of stablecoins such as DAI, had a notable impact. With dYdX experiencing its all-time activity high (by far) on 12 March 2020. With almost 600 unique wallets interacting with its smart contracts.

Looking at the monthly user flows for dYdX. One point of note is the big rise in new wallets during February 2020. Which was when the price of ETH approached $300 for the first time since July 2019.

Interestingly, a decent proportion of these new wallets were retained during March. Leading to a strong rise in monthly active unique wallets; from 534 to 1,110.

Also, dYdX has the highest monthly retention rate of any of the dapps covered in this report. Although it has declined from 76% in May 2019 to 53% in March 2020.

This likely demonstrates its competitive advantage in the DeFi ecosystem when it comes to margin trading.

Fulcrum

Also, like dYdX, it experienced very strong user growth during 2020. But Fulcrum’s peak activity wasn’t driven by the ETH price crash. Instead, it had a strong daily peak of 393 active unique wallets on 18 February. When an infamous flash loan attack occurred.

During this period, Fulcrum was also offering very high-interest rates. Spiking at 25% interest for ETH deposits and 12% for DAI in early March.

In contrast, when the ETH price crash occurred, Fulcrum’s daily active wallet count only reached 206. Granted that was its third-highest ever day. But it was relatively minor compared to the all-time high.

This spike and then a crash of activity is clearly demonstrated by Fulcrum’s monthly active graph. Which shows a large number of new wallets in February. And a large number of not retained (or ‘lost’) wallets in March.

Fulcrum’s relatively small user base compared to the likes of MakerDAO and Compound is also evident from the height of the columns.

As a trading dapp, Fulcrum’s monthly retention rate is generally higher than that of MakerDAO and Compound. It falls away in March as its trading features are switched off.

Ethereum DeFi ecosystem interactions

Up to this point, we’ve considered each Ethereum DeFi dapp in isolation. But it’s worth spending some time considering the interactions between these dapps.

We calculate this on a monthly basis by tracking how many wallets interact with MakerDAO also interact with the other Ethereum DeFi dapps in this report.

There are two main conclusions to draw from this comparison.

The first is the ongoing trend across Compound, dYdX, Fulcrum and Synthetix which shows a steady decline in the intersection of these dapps with MakerDAO over the past quarter.

This decline is particularly notable in the case of Compound, which dropped from 28% of wallets using MakerDAO also using Compound in January to 9% in March. This is clearly a result of the new savings features available directly within MakerDAO.

There’s also a large decline of interactions between MakerDAO and Fulcrum during this period. No doubt this was driven by Fulcrum’s decision to restrict its trading features. Which resulted in its smaller audience in March.

The interactions between MakerDAO and Synthetix, and dYdX declined by less but in both cases, there was an obvious drop.

Given all dapps experienced rising activity during this period, it’s clear – albeit for various reasons – MakerDAO captured a large slice of the active DeFi audience.

The other major trend to note is Compound, dYdX, and Fulcrum now all have a similar overlap to MakerDAO’s audience of around 10%.

As a standalone DeFi dapp (perhaps even its own ecosystem), the overlap between MakerDAO and Synthetix’s user bases is minimal and decreasing.

Conclusions

The Ethereum DeFi ecosystem has been expanding its audience since late 2019. This trend accelerated during the first three months of 2020.

This would have occurred even without the crypto price collapse of 12 March 2020. Triggered by a ‘flight to cash’ across all asset classes due to uncertainty over the economic impact of the Coronavirus.

This volatility highlighted weakness in the DeFi ecosystem, notably in terms of MakerDAO’s oracle and liquidation system. But even prior to this, many of these dapps – and DeFi stacks created using them – were being stress-tested. By both regular and manipulative activity c.f. flash loans.

The result has been a re-evaluation of the features offered by individual dapps, which has reversed previous growth. Hopefully, this will result in more resilient products. Leading to greater confidence by users as the sector regains momentum later in the year.